Hedge Funds Exit Housing Securities as Prices Rise

(Bloomberg) — Hedge funds that profited on residential mortgage debt after the financial crisis such as Pine River Capital Management and Canyon Partners are trimming their bets as prices rise.

Gorelick Brothers Capital is also exiting investments in both uninsured and government-backed home loan securities. The firm is seeking higher returns by raising a private equity fund to buy single-family rental houses, said Rael Gorelick, a co-founder of the firm.

Hedge funds that took a risk on distressed mortgage debt after the 2008 housing crash have had robust returns. Canyon Partners made $7 billion on non-agency securities in the decade before and after the financial crisis. Now these firms see dwindling opportunities as investors crowd into the market and issuance declines, pushing up prices of the non-agency debt.

“Spreads got tighter over the past few years,” said Colin Teichholtz, co-head of fixed income trading at Minnesota-based Pine River, which manages $15.5 billion. “It has gone from a great opportunity to a mediocre one.”

Returns at hedge funds that buy asset-backed securities, often including mortgage debt, averaged 10.2 percent last year, down from 13 percent in 2013, according to data compiled by Bloomberg.

Pine River cut its exposure to non-agency mortgage-backed securities, including subprime, from more than 40 percent in 2011 to below 10 percent today, Teichholtz said. The firm bought the debt at depressed prices after housing prices plummeted, and again in 2011 and 2012 when banks came under regulatory pressure to reduce their holdings.

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